What is APR?

Transcript: What is APR?

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A loan's Annual Percentage Rate, or APR, is the cost of your mortgage credit as a yearly rate.

Your Annual Percentage Rate is typically higher than your interest rate because it includes your interest rate plus certain fees, such as lender and mortgage broker fees, based on the specific characteristics of your loan.

This rate shows what percentage of your loan amount you will need to pay every year, over the life of your loan.

One type of fee often included in the APR is discount points.

Discount points are up-front charges paid to the lender voluntarily, usually by the borrower or seller, to reduce the interest rate. One point is equal to 1% of the principal amount of the mortgage.

Paying discount points can be advantageous if you have an extended loan term and you plan to stay in your new home for a while.

Applying for a loan isn't free. Another fee included in the APR is the amount the lender charges to process the loan application.

You'll hear this charge referred to as the "origination charge" and it includes any application, processing, and underwriting fees. These fees and charges vary. Typically the buyer pays the majority of the origination charge, but you can negotiate with the seller in your offer.

Lenders will approximate all the expected fees and charges in what's called the Loan Estimate, which estimates the total cost of the transaction.

As you can see, many variables can affect the cost of a loan, and it is important to look at not only the monthly amount you will pay, but the overall amount as well.